Brendan Caldwell, President and CEO of Caldwell Investment Management
FOCUS: Large-cap US stocks
MARKET OUTLOOK:
Looking ahead to 2022, a mix of headwinds created the perfect storm for equity markets and the consequent sale has caused most benchmarks to fall 20% or more from recent highs. Russia continues its assault on Ukraine, which has affected global flows of key commodities. China’s zero COVID policy forced ports to close, exacerbating existing supply chain problems. Finally, persistently high inflation causes the Federal Reserve (and other central banks) to act much more aggressively in raising rates than investors expected just a few months ago.
We believe the market is struggling with the fact that interest rates could remain high if inflation remains high. And after 12 years of near-zero interest rates, no pandemic stimuli and the growing odds of a recession, the outlook is very uncertain. One thing we are reasonably confident of is that markets are likely to experience high levels of volatility in the foreseeable future. We will continue to focus our efforts on finding high quality, well-run companies with proven track record of navigating difficult environments and believe that professional investment advice is extremely valuable in times like these.
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BEST SELECTIONS:
Brendan Caldwell’s best choices
Brendan Caldwell, President and CEO of Caldwell Investment Management, talks about his best options: Quanta Services, Capital Power and Murphy USA Inc.
Quanta Services (PWR NYSE)
Quanta Services is no longer a fundraiser, but remains a prominent place on our watchlist
- It is a well-run engineering and construction company with a lower risk profile than its peers
- End markets are benefiting from strong secular tailwinds
- Utility companies are investing to strengthen the network and expand them to prepare for things like charging electric vehicles
- Telecommunications are building 5G infrastructure over a period of several years
- Most revenues come from smaller maintenance contracts that are a unit price / cost plus, meaning they represent higher entry costs compared to fixed price contracts.
- These contracts also contribute to greater revenue and earnings stability over time compared to other engineering and construction partners (PWR has done a great job of minimizing exposure to larger fixed price contracts over time). )
- Finally, the industry is highly fragmented and PWR has demonstrated a strong history of growth through acquisition; so we believe there is still a long way to go
- More recently: we do not believe that the disruption of the solar industry is a significant headwind
- The Biden administrator seeks to temporarily eliminate Trump-era tariffs
- Solar power is crucial to U.S. carbon reduction goals, investment cannot be avoided, and domestic supply is likely to become a major focal point in the coming years.
- PWR management has said they can move the work to other areas to compensate for delayed solar projects in 2022
Capital Power (CPX TSX)
Held at CVM; most recent purchase: May 18, 2022, at $ 44.92
- Capital Power is an independent power producer with ~ 6,600 megawatts of generation capacity at 27 facilities in North America.
- They are operating in an environment of strong prices that we consider sustainable in the short and medium term given the favorable dynamics of supply and demand for energy prices in Alberta. Specifically:
- Demand for oil and gas is returning
- Aged thermal power generation assets from the industry are being withdrawn without significant replacements until 2024-25
- Marginal production costs are higher than before the pandemic
- They are in an enviable position relative to their peers as they have sold approximately 60% of the 2023 basic charge power generation while maintaining 90% more of the natural gas raw material requirements well below the market prices.
- Finally, they pledge to spend $ 0.5 million a year in capital to build their renewable platform both organically and inorganically.
- A strong acquisition channel has been observed on the inorganic side
Murphy USA (MUSA NYSE)
Most recent purchase: June 21, 2022, at $ 223.78
- Murphy USA is a leading supplier of refined fuel products in the USA
- It serves customers through a network of approximately 1,700 retail gas stores and through unbranded sales to wholesale customers.
- It’s a story of strong organic growth that still has legs. Historically, front-line results were driven by a combination of new store construction and renovation and expansion of existing stores with management, with the goal of 2-4% annual store growth.
- Recent mergers and acquisitions are expected to accelerate growth by strengthening the company’s convenience store offering
- Similar to Couche-Tard, MUSA expects to apply the lessons learned from the acquisition of QuickChek, which has leading gross margins in the marketing industry and has historically been strong in food and convenience items, compared to the rest. of the chain.
- This should increase the company’s margins over time
- MUSA’s core operations have an industry-leading cost structure, partially provided by its property real estate portfolio, and lower levels of retail fuel balance compared to the industry, which is helping drive share gains. market while expanding fuel margins.
- In today’s inflationary environment, MUSA’s price gap is widening compared to smaller competitors who have to pass on higher costs to survive; MUSA is reinvesting some margin expansion to capture market share (so we see it as a consumer reduction game)
- Gallons sold in the first quarter of 2022 exceeded first quarter 2019 levels; management. Seeing tickets of smaller sizes but more frequent trips helps to recover the rates of the merchandise (that is to say, to buy something inside with the purchase of gasoline)
PAST SELECTIONS: May 3, 2021
Brendan Caldwell’s previous election
Brendan Caldwell, President and CEO of Caldwell Investment Management, talks about his previous election: Martin Marietta Materials, Inc., Watsco and Fastenal Company.
Martin Marietta (MLM NYSE)
- Then: $ 354.56
- Now: $ 302.79
- Yield: -15%
- Total yield: -14%
Watsco (WSO NYSE)
- Then: $ 295.46
- Now: $ 235.18
- Yield: -20%
- Total yield: -18%
Fastenal (FAST NASD)
- Then: $ 53.00
- Now: $ 50.97
- Yield: -4%
- Total yield: -2%
Average total return: -11%
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